It is more or less evident to citizens by now - whether they like it or not - that simplifying the Internal Revenue Code should do two things: reduce inappropriate burdens and increase the ease of administration.
One of the first principles of a tax code that fulfills these requirements, the principle of taxes for revenue only, was endorsed in May 1977 by then Commission of Internal Revenue Jerome Kurtz. In his speech, "Tax Simplification," he said, " ……we should diligently resist attempts to use the tax law to achieve social goals, since such measures do not merely complicate the tax system, but may make it, in fact, less equitable."
One of the violations of the taxes-for-revenue-only principle is the tax expenditure, that is, expenses written off an individual or corporation's tax report as being allowable business deductions, and thus untaxed. A free pamphlet from the staff of the Joint Committee on Taxation tells us the "tax expenditure estimates measures the decrease in tax liabilities . . . that provide economic incentives . . . or tax relief…." In other words, taxes are being used to provide incentives for business, an obvious social goal.
To those who believe that the funds lost are minor, think again. For the fiscal year, which began October 1, 1985, the lost tax revenue to such expenditures totaled $424.5 billion.
Many alert citizens know that the loss in collections through cheating, in federal taxes of all kinds, is about $100 billion per year. Probably, most people suppose, validly, that the principal cause is the perception of massive unfairness is in the code, and that little of the loss is recoverable unless and until there is a reasonably fair tax system.
The half-trillion dollars vanishing this fiscal year through tax expenditures and cheating - the hidden half trillion - are not quite all collectible, or even actual dollars. An easy example, in the area of cheating, is the revenue fraud perpetrated by the moonshiner. Having gathered his supply of sugar and begun to work, this minor culprit never sees an amount of money equal to the amount he is supposedly defrauding the government. His product doesn't enter the public market. To say that with a few pennies worth of sugar he has cheated several dollars worth of liquor taxes violates common sense. He doesn't decide not to pay the excise tax on his illicit distilled spirits; he has never received the amount of money he owes.
However, there are more than enough dollars in this half-trillion to balance the budget, probably more than twice over.
Those Infamous Loopholes
Considered together, the loopholes called "percentage depletion" and "leaseback" illustrate a historical principle governing the code's evolution. When the income tax on corporations has operated respectably, it aimed at taxing net income, determined by adding up the relatively well-defined gross incomes, then subtracting, as "deductions," the cost of producing these incomes. Since components of gross income are generally much more difficult to falsify than the deductions, over-statements of the latter, in order to understate net income, are the common way to create loopholes.
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